if “Growth > ROE, cos will have to grow with increasing debt”. Now look at two examples prior to 2008/2009 crash. Company X was growing with very high ROCE (almost 50%). As growth was less than 50% they were giving either huge dividend payout(its peer with same fundamentals) or investing excess in equities. Due to this great financials which everyone on street was knowing, cos fetched almost 50 PE. But one bad year and working capital increased drastically and PE crashed to 5 thus 90% loss. Now consider another company Z which has exactely bad charactistic as above “Growth > ROCE”. Undoubtely Z’s debt was rising in same space. But one good thing about this cos was consistentely it had Operating cash flow greater than its PAT. In 2009 with margin doubleing from 5% to 10%, it retired its whole debt and reduced invetory which lead to drastic change in ROCE and hence PE rerating from 5 in and hence PE rerating from 5 in 2009 to PE 17 with EPS tripling in 4 years which lead to 10-bagger. X:Voltas/Bluestar and Z:Amara Raja. So whats point is analysing RCOE as “Great ROCE doesn’t mean great future”, “Bad ROCE (with rising debt) doesn’t mean bad future”, “Medicore invesments could be created from great ROCE cos”, “Great investments could be created from basd ROCE business”??

Originally posted by manish_okhade Originally posted by nikrod12 Manishji, for ROIC @ 17.5% and capex lead model, if they want to grow at current rates, they'll have to take more debt or raise more equity. I personally am averse for both. Do you think shareholders here will benefit as much as growth of co? Also would like to know if you know companies that went on to become multibaggers even with consistent low ROIC for years? Trying to understand whether this factor can be ignored in favor of good business model.. For a decent company ROIC figure worldwide is 20%. Its higher than FD return so not bad but not fabulous either. As a rule of thumb by default high ROIC companies are much better because they compund the money faster. In case of Treehouse, ROIC is lower in growth phase but if brand sustains then after capex saturation pricing power will drive up the ROIC. Beacause brand and pricing power loosely the same thing. This is something one has to bet for and wait would be quite long.....

Global RoCE of 20% has to be looked at in relation to the interest rates which is the opportunity cost of doing business. In a country where interest rate is 1% a 20% RoCE is more significant than a RoCE of 20% in a country with interest rates of 13%.